Federal Reserve holds steady on interest rates and stimulus effort

WASHINGTON -- With economic growth slowing in recent months, the Federal Reserve said Wednesday it would keep short-term interest rates near zero and continue its latest bond-buying stimulus program.

Following a two-day meeting, Fed policymakers said recent information "suggests that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors."

Those disruptions included the Midwest drought and Superstorm Sandy.

The statement from the Federal Open Market Committee, the central bank's policymaking arm, came after the Commerce Department unexpectedly reported the economy contracted at a 0.1% annual rate in the fourth quarter of last year.

It was the first time the economy shrank since the end of the great recession in 2009.

But most economists said the slowdown was an anomaly caused in part because of concerns about the fiscal cliff. They predicted the economy would grow about 2% in the first quarter of this year.

The closely watched wording of the Federal Open Market Committee's statement was a bit more pessimistic than after the last meeting in December. At that point, the Fed said economic activity and employment were expanding at a "moderate pace in recent months, apart from weather-related disruptions."

In September, the Fed launched its third round of bond buying to try to stimulate economic growth and reduce unemployment.

The central bank began an open-ended program to buy $85 billion in bonds a month to hold down long-term interest rates and boost business spending,

The Fed also said it anticipated short-term interest rates would remain near zero until the unemployment rate dropped to at least 6.5%, as long as inflation remained in check.

The unemployment rate was 7.8% in December and economists project it remained the same this month. The Labor Department will release the January jobs report Friday.